Sunday, September 25, 2005

More on Novartis.

Novartis Hedges Its Bets

Robert Langreth, 09.23.05, 12:00 PM ET

Over the last few years, the drug industry has gone into a funk, beset by patent expirations, empty research pipelines and safety scandals. But Swiss drug firm Novartis seems to keep rolling along.

Led by the cerebral Chief Executive Daniel Vasella, the company has introduced more drugs in the United States since 2000 than any other drug firm, according to A.G. Edwards. It has few big patent expirations coming up soon, and double-digit sales growth. And now it says it has an impressive 52 new drugs in mid-to-late-stage trials, four of which could be submitted for approval next year. The company's shares have produced steady if unspectacular returns, rising over 20% in the last two years, although the stock is basically flat this year.

Most important, the company has two potential big sellers that it expects to submit for consideration by the U.S. Food and Drug Administration next year. One, called vildagliptin or LAF237, is a new type of diabetes drug (see: "Diabetes Drugs To Watch"). The other, aliskiren (formerly known as SPP100), could be the first in a totally new class of blood pressure drugs called renin inhibitors (see: "Cardiovascular Drugs To Watch"). The diabetes drug faces competition from Merck (nyse: MRK - news - people ), which plans to submit a similar drug in 2006. However, the Novartis (nyse: NVS - news - people ) blood pressure drug appears to be well ahead of a similar compound in early tests at Merck and Actelion. Novartis says it has finished trials on over 8,500 patients, with no signs of any serious side effects.

"It looks better than Diovan" in terms of efficacy, Vasella says of aliskiren, comparing it with the company's big-selling Diovan hypertension drug. "If the drug proves to be as good as it looks now, it certainly would be a multibillion-dollar product."

In a clue as to how Novartis might market the drug, Vasella emphasized that the compound appeared to be particularly good at keeping blood pressure down in the predawn hours, when it tends to spike. Still, the drug will face tremendous competition from numerous existing drugs, such as Norvasc from Pfizer (nyse: PFE - news - people ), as well as various generic compounds. "The road to likely to be a long and arduous one if for no other reason than that the hypertension market is well-satisfied," said Prudential analyst Tim Anderson in a research note this week.

Like a savvy hedge fund manager, Dr. Vasella is constantly adjusting his research portfolio to ensure profitable output, no matter what types of drugs end up being the new hot growth areas. Long before it became fashionable, Vasella established separate specialty- and cancer-drug units to make biotech-style bets on less common but more severe diseases, supplementing the traditional big pharma focus on primary care. While these areas might be smaller in terms of numbers of patients, breakthrough drugs for severe diseases can command premium prices.

"We have tried to get a portfolio where we have some really breakthrough drugs, but at the same time we have less risky projects where we know the mechanism," Vasella says. Noting the ever-increasing market share for copycat generics, Vasella has vastly increased Novartis' presence in this area as well.

One of Novartis' more promising cancer drugs is AMN107 for chronic myeloid leukemia, a successor to the firms' breakthrough drug, Gleevec. Initial trials showed that the drug could help many patients whose leukemia has become resistant to Gleevec. Pivotal second-stage trials are underway, and the drug could be submitted for approval in 2007. Novartis is in a race with Bristol-Myers Squibb (nyse: BMY - news - people ), which has a similar drug in testing.

Under the direction of research honcho Mark Fishman, Novartis is also moving into a number of surprising new areas, including spinal cord injury, cystic fibrosis and a rare immune system disorder called Muckle-Wells syndrome. His novel concept is that by testing drugs on less common diseases first, Novartis can conduct a relatively small clinical trial and quickly get a good idea whether a new drug is hitting its intended target. This could then pave the way for longer, more difficult trials for common diseases.

Separately, Dr. Vasella said that purchasing Chiron (nasdaq: CHIR - news - people ) is not crucial for the Swiss drug firm, and that he would not wait forever to come to a merger agreement with the biotech firm. The two companies have been mired in a stalemate ever since Chiron's independent directors rejected Novartis' offer to acquire the Chiron shares it doesn't already own, for $40 per share--or $4.5 billion. Chiron's independent directors called that amount "inadequate" in a statement.

"Everything is possible. We have made our offer, we stand by it, and we wait," said Vasella. He added that while it "would be nice" to do the deal, it "is not a necessity, it is not critical for Novartis." Chiron shares were recently trading above $43, indicating the market expects a modestly higher bid to eventually emerge.

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